NEW YORK Sanjiv Ranjan Das, a professor at California's Santa Clara University, last fall attacked the problem of "underwater" mortgages often cited as an Achilles' heel to the U.S. housing market.

He had a special fan: Sanjiv Das, the top executive at CitiMortgage, the nation's fourth-largest home loan lender and servicer of $723 billion in mortgages.

Coincidental ties extending back to their mid-1980s attendance at the Indian Institute of Management have resulted in meetings of the academic and banking minds over the biggest conundrum of today's housing market.

The two men took separate paths for 25 years, but are now grappling with the behavior of borrowers faced with job loss, burdensome mortgages and a slump in home values that has caused many mortgages to exceed the value of their properties.

Stark reminders of the connection surfaced as Professor Das in mid-2008 began receiving e-mail messages meant for CitiMortgage's Das from borrowers, real estate agents and the mayor of East Cleveland, Ohio. Professor Das has fielded dozens of e-mails seeking help, or to express frustrations.

"I started getting these messages, so people were really tracking things," he said. "Some were angry."

For Professor Das the connection was fortuitous for his research, which urges bankers to ramp up the controversial practice of forgiving principal in loan modifications. Banks have found such calls hard to swallow because it speeds up losses, and there is widespread disagreement of how to do it fairly or keep borrowers from assuming it could happen in the future.

Professor Das asserts that principal forgiveness of some kind is the "optimal" loan modification. Even so -- after meeting with CitiMortgage's Das last fall, and with other bankers and regulators -- further study is needed, he said.

"The problem is a lot bigger than what I wrote about," he said. "All the major banks are trying their best to help homeowners out as much as they can, but it's just too much. They are swamped."

Underwater loans became a by-product of the housing crisis as falling prices erased already thin layers of equity many Americans held in their homes. Accounts of underwater borrowers walking away from their homes, even if they have jobs, have set off fears that such "strategic defaults" would overwhelm lender efforts to curb foreclosures by only lowering payments.

More than 11.3 million, or 24 percent, of residential properties with mortgages had negative equity at the end of 2009, according to FirstAmerican CoreLogic.

But lenders still resist calls to cut principal. At CitiMortgage, interest rate reductions and term extensions remain the preferred ways to reach affordability, its CEO said.

"I like the way he's framed his thinking, however, there's more work to be done to take into account moral hazard and fairness, which are extremely hard to quantify," Das said.

The two men may now collaborate on research to identify which borrowers are at risk of default due to income loss and those who might not pay only because of eroded net worth. To determine what is "income shock" or "wealth shock" will result in better loan modifications, Professor Das said.

(Editing by Leslie Adler)

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